While the world was following the tragic events unfolding on Friday night in France where hundreds of innocent civilians were killed or injured, an important economic development took place at the IMF, whose staff and head Christine Lagarde, officially greenlighted the acceptance of China's currency - the Renminbi, or Yuan - into the IMF's foreign exchange basket, also known as the Special Drawing Rights.
As Reuters summarizes [19], the recommendation paves the way for the Fund's executive board, which has the final say, to place the yuan on a par with the U.S. dollar Japanese yen, British pound and euro at a meeting scheduled for November 30. At this point only an explicit veto by US political interests deep behind the stage can derail the CNY's ascension into the SDR. The United States, the Fund's biggest shareholder, has said it would back the yuan's inclusion if it met the IMF's criteria, a U.S. Treasury spokesperson said, adding: "We will review the IMF’s paper in that light."
If the yuan's addition wins 70 percent or more of IMF board votes, it will be the first time the number of currencies in the SDR basket - which determines the composition of loans made to countries such as Greece - has been expanded."
I would say that the likelihood of China's yuan joining the IMF currency basket this year is very high," said Hong Kong-based Shen Jianguang, chief economist at Mizuho Securities Asia.
"The only thing that could deter this is if the U.S. led a group rejecting the yuan's inclusion, which could complicate things. But the United States' current official stance doesn't reflect such an attitude," he said.
Unless something dramatically changes in the next three weeks, of course, although that seems unlikely: moments ago Bloomberg reported that Treasury Secretary Lew met with Chinese Vice Premier Wang Yang and Finance Minister Lou Jiwei on the sidelines of the G-20 Leaders Summit in Antalya, Turkey, according to readout sent via e-mail by U.S. Treasury, where “Secretary Lew reiterated that the United States intends to support the Renminbi’s inclusion in the Special Drawing Rights basket provided the currency meets the International Monetary Fund’s existing criteria."
The executive board, which represents the Fund's 188 members, is seen as unlikely to go against a staff recommendation and countries including France and Britain have already pledged their support for the change. This would take effect in October 2016, during China's leadership of the Group of 20 bloc of advanced and emerging economies.
As Reuters further adds, joining the Special Drawing Rights (SDR) basket would be a victory for Beijing, which has campaigned hard for the move, and could increase demand for the yuan among reserve managers as well as marking a symbolic coming of age for the world's second-largest economy. In an ironic twist,, while the IMF has historically delayed the moment of acceptance, it caved just months after China officially devalued its currency for the first time in decades to stimulate its exports, and has unleashed an unprecedented campaign (using overt and covert means) to stabilize the Yuan as capital outflows in the past several months have soared.
Reuters is likewise amused by this hypocrisy: "China's heavy-handed intervention to stem a stock market rout over the summer, and an unexpected devaluation of the yuan in August, had raised some doubts about Beijing's commitment to reforms."
Unless, of course, the whole facade of "reform" is just an epic smokescreen and what the IMF is truly rewarding is gross market manipulation and currency warfare, such as what all developed nations have engaged in since the great financial crisis.
Singapore-based Commerzbank economist Zhou Hao said China needs to further accelerate domestic reforms and improve policy transparency. "The PBOC should reduce the frequency of market intervention, allowing market forces to really play a critical role."
No matter what the real reasons behind the historic development, IMF said its staff had found the yuan met the criteria of being “freely usable,” or widely used for international transactions and widely traded in major foreign exchange markets, Lagarde said. “I support the staff’s findings," she said in a statement immediately welcomed by China's central bank, which said it hoped the international community would also back the yuan's inclusion.
Still, even if formally accepted, few if any reserve managers will rush out to buy Yuan: China's extensive capital controls mean it would take a while before the yuan rivals the dollar's dominant role in international trade and finance, analysts say.
Its closed capital account still limits foreigners from buying yuan-denominated assets and places caps on how much cash residents can take out of the country. These restrictions, along with concerns that the yuan is set to come under steady depreciation pressure, may cause corporates to back off from holding yuan.
Nonetheless, the People's Bank of China said the IMF statement was an acknowledgment of the progress China had made in reforms and opening up its economy.
We suppose by that it means arresting stock shorters, prominent fund managers, doubling margin requirements at will, and crushing anyone who dares to sell the currency in the "open market."
Putting aside this latest glaring example of globalist hypocrisy, here are the initial early responses by various Wall Street analysts.
HSBC:
- SDR inclusion would encourage China to stick to much- needed financial and capital-account liberalization, Paul Mackel, HK-based head of global research, writes in note dated Nov. 14
- USD/CNH moved above 6.4000 on Friday, which could suggest that more flexibility on yuan is coming
- Market players will want to see more volatility in the currency eventually; hence, inclusion in SDR doesn’t necessary mean that the RMB will be stronger
- Knee-jerk reaction for yuan to strengthen should be temporary; will be interesting to see if PBOC decides to become more hands-off
Commerzbank:
- China needs to show commitment to further opening up its capital account and accelerate domestic financial reforms, led by interest-rate liberalization, Zhou Hao, Singapore-based senior economist, writes in email
- Country needs to improve policy transparency to attract global investors; that would build trust between global investors and Chinese authorities
- PBOC should reduce frequency of intervention, allowing market forces to play a critical role
- China should provide more hedging options to corporates and financial institutions, so they can prepare for greater financial-market volatility
Huabao Trust:
- China stepped up rates liberalization in run-up to SDR inclusion; now it may increase pace of financial reform, Nie Wen, Shanghai-based economist, says in phone interview
- Onshore-offshore yuan spread is expected to narrow in coming days
- PBOC’s monetary policy stance will still be the most important element for investors to gauge regarding the yuan’s trading direction
- A more market-oriented system is crucial for Chinese capital markets; a “reasonable” pricing of domestic assets will reduce systemic risk
Maybank:
- Inclusion will largely be a symbolic move because slowing economy and capital-outflow pressures may delay FX reforms, Fiona Lim, senior FX analyst, says in phone interview
- SDR inclusion will improve “rationality” in investment and assets allocation, which will improve financial stability
SocGen:
- Any positive reaction on yuan’s possible inclusion in IMF reserves to be short-term, given that the outcome was well priced in, says Jason Daw, head of Asia currency strategy at Societe Generale SA in Singapore.
- Being added to SDR unlikely to speed up the pace of reserve diversification into Chinese assets, Daw says in Nov. 14 e- mail interview
- “We continue to see an upward bias to USD/CNY over the coming months and expect it to reach 6.80 by mid-2016.”
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It would be most ironic, however, if China achieves its ultimate objective, which is simply to find foreign buyers for its currency as an offset to domestic outflows, which in turn sends the Yuan soaring beyond its pre-devaluation levels, thereby slamming the Chinese economy even further and assuring that the unfolding Chinese hard landing becomes a full-blown global crash .
